What to Divest in 2012

Many investors don't lose sleep at night agonizing about the social responsibility of their portfolios, but perhaps more should. Holding on to positions in companies that may have damaging effects on people and the planet in 2012 is an investment anachronism that's behind the times.

Investors shouldn't think every buy and sell decision must hinge entirely on valuation and shareholder value in the numerical sense. One of the biggest pension funds in the world recently divested itself of Wal-Mart (NYS: WMT) , and that decision had nothing to do with Wal-Mart's cold, hard numbers, but rather a crisis of conscience.

Don't buy, but blacklistThe Netherlands' biggest pension fund, Algemeen Burgerlijk Pensioenfonds (ABP), which controls $300 billion in assets, retooled its philosophy to corporate responsibility several years ago. The fund has recently booted Wal-Mart, citing noncompliance with the United Nations' Global Compact principles. Word on the street is that ABP had put the equivalent of $121 million into Wal-Mart as of last summer.

ABP repeatedly tried to work with Wal-Mart to improve its labor practices and environmental policies, but as of now, it's decided its efforts have been futile, so it's sold its stake.

Wal-Mart's not the only company that ABP has "blacklisted." It also ditched PetroChina (NYS: PTR) from its holdings, citing operations in human rights-challenged Sudan and Burma.

There are many reasons ethical funds might pull their money out of companies that refuse to make changes for the good.

United Methodist General Board of Pension & Health Benefits, the largest faith-based pension fund in the U.S., recently divested from two of the largest for-profit prison companies, Corrections Corp. of America (NYS: CXW) and GEO Group (NYS: GEO) . It has also added a new screen to forbid investing in companies that generate more than 10% of revenue from managing and operating prison facilities.

The growing definition of "sin stock"Socially responsible investing has come a long way from simply screening out guns, smokes, pornography, and booze. There are plenty of reasons a company might not be considered particularly ethical, even if it isn't a traditional "sin stock."

Some social investment funds and green funds pulled out of BP after the Deepwater Horizon disaster. Also in 2010, Chicago-based SRI fund Appleseed rethought what kind of companies it would allow in its holdings. In light of the financial crisis, it announced it would screen out "too-big-to-fail" banks like Citigroup, Goldman Sachs, and Bank of America (NYS: BAC) .

These views aren't coming from the financial fringe; investing with a conscience is venturing into mainstream investment thought. A report from US SIF Foundation (affiliated with The Forum for Sustainable and Responsible Investment) recently revealed almost 16% growth in assets directed into investment funds using environmental, social, and governance criteria since the beginning of 2010. This investment area now represents more than $3 trillion in the U.S. alone.

Cleaning up portfolios in 2012Granted, there's a reason many socially responsible funds own or owned shares of some fairly odious companies to begin with, giving them the opportunity to later divest. They're functioning as activists, trying to push for positive change by the act of share ownership. That's classic capitalism right there.

As far as we individual investors go, simply screening out the bad guys seems like a good defense to build strong portfolios. Furthermore, we're all going to have individualized viewpoints about the which companies are socially responsible or not. For example, I find for-profit prisons and megabanks more ethically challenged than alcohol and tobacco stocks, but that's my personal spin on the sphere.

Regardless, whether a company has a responsible, positive place in society is a question that's worth asking when researching new stock ideas. And how about researching old purchases? It seems to me 2012 is a good time to make like some of the funds above, clean house, and divest the black-hat stocks. At some point, doing the wrong thing often catches up with companies, one way or another; such stocks could leave investors holding the bag.

Check back atFool.comevery Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.

At the time this
article was published Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Bank of America, Citigroup, and Wal-Mart. Motley Fool newsletter services have recommended buying shares of Corrections Corporation of America, Goldman Sachs, and Wal-Mart, as well as creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.